REPORT TITLE:
New Economy


DESCRIPTION:
Consolidates state agencies that support technology-related
businesses.  Allows qualified high technology businesses to sell
their unused net operating loss carryover to any other taxpayer.
Expands the income tax exclusion for royalties and other income
from high technology businesses.  Allows partnership investors
the flexibility of allocating the high technology business
investment tax credit among partners without regard to their
proportionate interests in their partnership investment vehicle.
Makes the high-technology business investment tax credit and the
tax credit for increasing research activities refundable to the
taxpayer or allowing the credits to be used against the
taxpayer's income tax liability in subsequent years until
exhausted.  Conforms the state tax credit for increasing research
activities with the federal tax credit.  Allows the board of
trustees of the employees' retirement system (ERS) to invest ten
percent of ERS funds in qualified high technology businesses.
Appropriates funds for education, workforce development, and
University of Hawaii research and training.  Exempts members of
the governor's special advisory council for technology
development from the senate confirmation process and from the
need to file a disclosure of financial interest with the state
ethics commission.  Promotes Hawaii, through a coordinated
statewide effort, as an internet and server-friendly place to
conduct electronic commerce, including entering into appropriate
public-private sector business partnerships.  (HB2901 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2901
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE NEW ECONOMY.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The "New Economy" is an economy based on
 
 2 knowledge and ideas.  It is an economy where the keys to job
 
 3 creation and higher standards of living are innovative ideas and
 
 4 technology embedded in services and manufactured products.  It is
 
 5 an economy where risk, uncertainty, and constant change are the
 
 6 rule rather than the exception.  It is an economy in a world of
 
 7 innovation where there is rapid convergence of technology,
 
 8 telecommunications, and media.  As a result, partnerships, such
 
 9 as MSNBC and AOL-Time Warner, become staples of this rapidly
 
10 moving industry.
 
11      Hawaii is competing in this New Economy.  Hawaii offers
 
12 great advantages not available in other areas of the world:
 
13 unparalleled quality of life, rich and diverse cultures, and an
 
14 educated populace.  In 1999, the twentieth legislature, the
 
15 educational system, and administration partnered to demonstrate
 
16 their commitment of support for an aggressive development of high
 
17 technology resources.  Act 178, Session Laws of Hawaii 1999,
 
18 called for the integration of technology with some of Hawaii's
 
19 industries, the increase of technology professionals through work
 

 
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 1 force development programs, and the creation of economic
 
 2 incentives for businesses to increase high technology research
 
 3 activities.
 
 4      Since geographic location and isolation are no longer
 
 5 detrimental factors when competing in a global market, the
 
 6 legislature believes that it must continue the effort started in
 
 7 1999.  The purpose of this Act is to encourage the continued
 
 8 growth and development of high technology businesses and
 
 9 associate industries relying on these in Hawaii by:
 
10      (1)  Consolidating state agencies that support technology-
 
11           related businesses to provide clear focus and
 
12           functions;
 
13      (2)  Creating tax credits to encourage research and
 
14           development for intellectual properties;
 
15      (3)  Providing for the issuance of special purpose revenue
 
16           bonds for support and assistance to developers and high
 
17           technology companies;
 
18      (4)  Providing for the continued funding for Act 178,
 
19           Session Laws of Hawaii 1999;
 
20      (5)  Creating partnerships with the tourist industry to
 
21           market and promote Hawaii's emerging technology
 
22           industries and Hawaii as an ideal venue to conduct
 
23           e-business; and
 

 
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 1      (6)  Effectively developing the growth indicators of the New
 
 2           Economy.
 
 3                PART I.  CONSOLIDATION OF AGENCIES
 
 4      SECTION 2.  The purpose of this part is to require the
 
 5 special advisor for technology development, which was established
 
 6 within the office of the governor by Act 178, Session Laws of
 
 7 Hawaii 1999, section 3, to develop a plan for the consolidation
 
 8 of the Hawaii strategic development corporation, the natural
 
 9 energy laboratory of Hawaii authority, and the high technology
 
10 development corporation, in order to facilitate the efforts of
 
11 the private sector in a manner that is coordinated, focused, and
 
12 responsive to the needs of the private sector.
 
13      SECTION 3.  Section 27-41, Hawaii Revised Statutes, is
 
14 amended by amending subsection (b) to read as follows:
 
15      "(b)  The duties of the special advisor shall include but
 
16 not be limited to:
 
17      (1)  Developing, coordinating, and implementing short- and
 
18           long-range state policies and directions to enhance the
 
19           development of high technology industries in Hawaii;
 
20      (2)  Coordinating all state high technology agencies [while
 
21           developing];
 
22      (3)  Developing a plan for the reorganization or
 
23           consolidation of [these agencies] the Hawaii strategic
 
24           development corporation, the natural energy laboratory
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           of Hawaii authority, and the high technology
 
 2           development corporation in the interests of greater
 
 3           efficiency and cost effectiveness[;] and to facilitate
 
 4           the efforts of the private sector in a manner that is
 
 5           coordinated, focused, and responsive to the needs of
 
 6           that sector.  The reorganization or consolidation of
 
 7           these agencies shall include the following:
 
 8           (A)  The creation of a clear sense of mission for the
 
 9                resulting agency or agencies;
 
10           (B)  The development of user-friendly services;
 
11           (C)  The adoption of "best practices" of management and
 
12                operations and search for economies of scale;
 
13           (D)  The elimination of duplicative or outmoded
 
14                functions and activities;
 
15           (E)  The enhancement of productivity by consolidating
 
16                functions;
 
17           (F)  The elimination of unnecessary regulation;
 
18           (G)  The redesigning of processes to increase
 
19                efficiency;
 
20           (H)  The exposure of government operations to
 
21                competition; and
 
22           (I)  The realization of long-term savings;
 

 
 
 
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 1     [(3)] (4)  Advising the private sector in the development of
 
 2           high technology activities and resources and providing
 
 3           technical or other assistance to private industry upon
 
 4           request;
 
 5     [(4)] (5)  Creating, disseminating, and updating a listing of
 
 6           all high technology assistance programs in the State
 
 7           and where they can be reached;
 
 8     [(5)] (6)  Pursuing appropriate public-private sector
 
 9           business partnerships;
 
10     [(6)] (7)  Coordinating the State's promotion and marketing
 
11           of the high technology industry, including a review of
 
12           current marketing efforts;
 
13     [(7)] (8)  Arranging for the conduct of research through
 
14           contractual services with the University of Hawaii or
 
15           any agency or other qualified persons;
 
16     [(8)] (9)  Encouraging the development of educational,
 
17           training, and career programs in high technology
 
18           industries; and
 
19     [(9)] (10)  Performing other necessary or desirable functions
 
20           to facilitate the intent of this section."
 
21                       PART II.  TAX CREDITS
 
22      SECTION 4.  The purpose of this part is to:
 
23      (1)  Allow qualified high technology businesses to sell
 
24           their unused net operating loss carryover to any other
 
25           taxpayer;
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  Amend the high technology-related definitions in the
 
 2           income tax law by:
 
 3           (A)  Adding a new section consolidating all of the
 
 4                high-technology definitions in chapter 235, Hawaii
 
 5                Revised Statutes, into section 235-1, Hawaii
 
 6                Revised Statutes;
 
 7           (B)  Repealing the corresponding definitions from the
 
 8                high technology tax credit sections;
 
 9           (C)  Adding new definitions of "computer data" and
 
10                computer program"; and
 
11           (D)  Amending the definition of "qualified high
 
12                technology business" to mean a business that
 
13                conducts a majority, rather than one hundred per
 
14                cent, of its activities in performing qualified
 
15                research in Hawaii, or receives a majority, rather
 
16                than one hundred per cent, of its gross income
 
17                derived from qualified research;
 
18      (3)  Amend the income tax exclusion for royalties and other
 
19           income from high technology businesses established by
 
20           Act 178, Session Laws of Hawaii 1999, section 22, by
 
21           expanding that exclusion to include royalties derived
 
22           from any patent, copyright, or trade secret for any
 
23           individual or other person who owns the patent or
 
24           copyright;
 

 
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 1      (4)  Amend the section relating to operation of certain
 
 2           Internal Revenue Code provisions to allow partnership
 
 3           investors the flexibility of allocating the high
 
 4           technology business investment tax credit in section
 
 5           235-110.9, Hawaii Revised Statutes, among partners
 
 6           without regard to their proportionate interests in
 
 7           their partnership investment vehicle;
 
 8      (5)  Amend the high-technology business investment tax
 
 9           credit under section 235-110.9, Hawaii Revised
 
10           Statutes, and the tax credit for increasing research
 
11           activities under section 235-110.91, Hawaii Revised
 
12           Statutes, by making the credit refundable to the
 
13           taxpayer or allowing the credit to be used against the
 
14           taxpayer's income tax liability in subsequent years
 
15           until exhausted; and
 
16      (6)  Conform the tax credit for increasing research
 
17           activities under section 235-110.91, Hawaii Revised
 
18           Statutes, to that provided under the Internal Revenue
 
19           Code, thereby increasing the tax credit from 2.5 per
 
20           cent to twenty per cent to match the federal rate.
 
21      SECTION 5.  Chapter 235, Hawaii Revised Statutes, is amended
 
22 by adding a new section to be appropriately designated and to
 
23 read as follows:
 

 
Page 8                                                     2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      "235-    High technology; sale of unused net operating loss
 
 2 carryover.  (a)  A qualified high technology business may apply
 
 3 to the department of taxation to sell its unused net operating
 
 4 loss carryover to another taxpayer.  If approved by the
 
 5 department of taxation, a qualified high technology business may
 
 6 sell its unused net operating loss carryover for private
 
 7 financial assistance from another taxpayer in an amount equal to
 
 8 at least seventy-five per cent of the amount of the surrendered
 
 9 tax benefit.  The tax benefit purchased by the buyer shall be
 
10 claimed in the year the sale is approved by the department.  Any
 
11 use of the purchased tax benefit for tax carryback or
 
12 carryforward purposes shall comply with applicable law.  The
 
13 financial assistance gained by the seller qualified high
 
14 technology business shall be reported on its tax return but shall
 
15 not be considered taxable income.  The total amount of unused net
 
16 operating losses sold annually pursuant to this section shall not
 
17 exceed $        .
 
18      (b)  No application for the sale of unused net operating
 
19 losses shall be approved if the seller qualified high technology
 
20 business:
 
21      (1)  Has demonstrated positive net income in any of the two
 
22           previous full years of ongoing operations as determined
 
23           on its financial statements;
 

 
Page 9                                                     2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  Has demonstrated a ratio in excess of one hundred ten
 
 2           per cent or greater of operating revenues divided by
 
 3           operating expenses in any of the two previous full
 
 4           years of operations as determined on its financial
 
 5           statements; or
 
 6      (3)  Is directly or indirectly at least fifty per cent owned
 
 7           or controlled by another corporation that has
 
 8           demonstrated positive net income in any of the two
 
 9           previous full years of ongoing operations as determined
 
10           on its financial statements or is part of a
 
11           consolidated group of affiliate corporations, as filed
 
12           for federal income tax purposes, that in the aggregate
 
13           has demonstrated positive net income in any of the two
 
14           previous full years of ongoing operations as determined
 
15           on its combined financial statements.
 
16      (c)  The department of taxation shall adopt rules pursuant
 
17 to chapter 91 to implement this section, which shall include the
 
18 following:
 
19      (1)  Procedure and criteria for the approval or disapproval
 
20           of applications filed by qualified high technology
 
21           businesses selling unused net operating losses; and
 
22      (2)  Criteria to provide for the equitable apportionment of
 
23           qualified sales allowed annually under this section to
 
24           eligible applicants."
 

 
Page 10                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      SECTION 6.  Section 235-1, Hawaii Revised Statutes, is
 
 2 amended by adding six new definitions to be appropriately
 
 3 inserted and to read as follows:
 
 4      ""Computer data" means any representation of information,
 
 5 knowledge, facts, concepts, or instructions that is being
 
 6 prepared or has been prepared and is intended to be processed, is
 
 7 being processed, or has been processed in a computer or computer
 
 8 network.  "Computer data" includes works in the performing arts
 
 9 such as audio files, video files, audiovisual files, computer
 
10 animation, and other entertainment products that are perceived by
 
11 or through the operation of a computer.
 
12      "Computer program" means an ordered set of computer data
 
13 representing coded instructions or statements, that, when
 
14 executed by a computer, causes the computer to perform one or
 
15 more computer operations.
 
16      "Computer software" means computer data, a computer program,
 
17 or a set of computer programs, procedures, or associated
 
18 documentation concerned with the operation and function of a
 
19 computer system, and includes both systems and application
 
20 programs and subdivisions, such as assemblers, compilers,
 
21 routines, generators, and utility programs.
 
22      "Investment" means a nonrefundable investment, at risk, as
 
23 that term is used in section 465 (with respect to deductions
 
24 limited to amount at risk) of the Internal Revenue Code, in a
 

 
Page 11                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 qualified high technology business, of cash that is transferred
 
 2 to the qualified high technology business, the transfer of which
 
 3 is in connection with a transaction in exchange for stock,
 
 4 interests in partnerships, joint ventures, or other entities,
 
 5 licenses (exclusive or nonexclusive), rights to use technology,
 
 6 marketing rights, warrants, options, or any items similar to
 
 7 those included in this definition, including but not limited to
 
 8 options or rights to acquire any of the items included in this
 
 9 definition.  The nonrefundable investment is entirely at risk of
 
10 loss where repayment depends upon the success of the qualified
 
11 high technology business.  If the money invested is to be repaid
 
12 to the taxpayer, no repayment except for dividends or interest
 
13 shall be made for at least three years from the date the
 
14 investment is made.  The annual amount of any dividend and
 
15 interest payment to the taxpayer shall not exceed twelve per cent
 
16 of the amount of the investment.
 
17      "Qualified high technology business" means:
 
18      (1)  A business, employing or owning capital or property, or
 
19           maintaining an office, in this State; and which
 
20      (2)  (A)  Conducts a majority of its activities in
 
21                performing qualified research in this State; or
 
22           (B)  Receives a majority of its gross income derived
 
23                from qualified research; provided that the income
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                is received from products sold from, manufactured,
 
 2                or produced in the State; or services performed in
 
 3                this State.
 
 4      The term "qualified high technology business" does not
 
 5 include:
 
 6      (1)  Any trade or business involving the performance of
 
 7           services in the field of law, architecture, accounting,
 
 8           actuarial science, performing arts, consulting,
 
 9           athletics, financial services, or brokerage services;
 
10      (2)  Any banking, insurance, financing, leasing, rental,
 
11           investing, or similar business; any farming business,
 
12           including the business of raising or harvesting trees;
 
13           any business involving the production or extraction of
 
14           products of a character with respect to which a
 
15           deduction is allowable under section 611 (with respect
 
16           to allowance of deduction for depletion), 613 (with
 
17           respect to basis for percentage depletion), or 613A
 
18           (with respect to limitation on percentage depleting in
 
19           cases of oil and gas wells) of the Internal Revenue
 
20           Code;
 
21      (3)  Any business operating a hotel, motel, restaurant, or
 
22           similar business; and
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (4)  Any trade or business involving a hospital, a private
 
 2           office of a licensed health care professional, a group
 
 3           practice of licensed health care professionals, or a
 
 4           nursing home.
 
 5      "Qualified research" means:
 
 6      (1)  The same as in section 41(d) of the Internal Revenue
 
 7           Code; or
 
 8      (2)  Developing, designing, modifying, programming, and
 
 9           licensing computer software;
 
10 except that it shall not include research conducted outside the
 
11 State."
 
12      SECTION 7.  Section 235-2.4, Hawaii Revised Statutes, is
 
13 amended to read as follows:
 
14      "235-2.4  Operation of certain Internal Revenue Code
 
15 provisions.(a)  Section 63 (with respect to taxable income
 
16 defined) of the Internal Revenue Code shall be operative for the
 
17 purposes of this chapter, except that the standard deduction
 
18 amount in section 63(c) of the Internal Revenue Code shall
 
19 instead mean:
 
20      (1)  $1,900 in the case of:
 
21           (A)  A joint return as provided by section 235-93; or
 
22           (B)  A surviving spouse (as defined in section 2(a) of
 
23                the Internal Revenue Code);
 

 
Page 14                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  $1,650 in the case of a head of household (as defined
 
 2           in section 2(b) of the Internal Revenue Code);
 
 3      (3)  $1,500 in the case of an individual who is not married
 
 4           and who is not a surviving spouse or head of household;
 
 5           or
 
 6      (4)  $950 in the case of a married individual filing a
 
 7           separate return.
 
 8      Section 63(c)(4) shall not be operative in this State.
 
 9 Section 63(c)(5) shall be operative, except that the limitation
 
10 on basic standard deduction in the case of certain dependents
 
11 shall be the greater of $500 or such individual's earned income.
 
12 Section 63(f) shall not be operative in this State.
 
13      The standard deduction amount for nonresidents shall be
 
14 calculated pursuant to section 235-5.
 
15      (b)  Section 72 (with respect to annuities; certain proceeds
 
16 of endowment and life insurance contracts) of the Internal
 
17 Revenue Code shall be operative for purposes of this chapter and
 
18 be interpreted with due regard to section 235-7(a), except that
 
19 the ten per cent additional tax on early distributions from
 
20 retirement plans in section 72(t) shall not be operative for
 
21 purposes of this chapter.
 
22      (c)  Section 121 (with respect to the exclusion of gain from
 
23 the sale of principal residence) of the Internal Revenue Code
 

 
Page 15                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 shall be operative for purposes of this chapter, except that for
 
 2 the election under section 121(f), a reference to section 1034
 
 3 treatment means a reference to section 235-2.4(n) in effect for
 
 4 taxable year 1997.
 
 5      (d)  Section 219 (with respect to retirement savings) of the
 
 6 Internal Revenue Code shall be operative for the purpose of this
 
 7 chapter.  For the purpose of computing the limitation on the
 
 8 deduction for active participants in certain pension plans for
 
 9 state income tax purposes, adjusted gross income as used in
 
10 section 219 as operative for this chapter means federal adjusted
 
11 gross income.
 
12      (e)  Section 220 (with respect to medical savings accounts)
 
13 of the Internal Revenue Code shall be operative for the purpose
 
14 of this chapter, but only with respect to medical services
 
15 accounts that have been approved by the Secretary of the Treasury
 
16 of the United States.
 
17      (f)  Section 408A (with respect to Roth Individual
 
18 Retirement Accounts) of the Internal Revenue Code shall be
 
19 operative for the purposes of this chapter.  For the purposes of
 
20 determining the aggregate amount of contributions to a Roth
 
21 Individual Retirement Account or qualified rollover contribution
 
22 to a Roth Individual Retirement Account from an individual
 
23 retirement plan other than a Roth Individual Retirement Account,
 

 
Page 16                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 adjusted gross income as used in section 408A as operative for
 
 2 this chapter means federal adjusted gross income.
 
 3      (g)  In administering the provisions of sections 410 to 417
 
 4 (with respect to special rules relating to pensions, profit
 
 5 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
 6 respect to special rules for multiemployer plans), and sections
 
 7 419 and 419A (with respect to treatment of welfare benefit funds)
 
 8 of the Internal Revenue Code, the department of taxation shall
 
 9 adopt rules under chapter 91 relating to the specific
 
10 requirements under such sections and to such other administrative
 
11 requirements under those sections as may be necessary for the
 
12 efficient administration of sections 410 to 419A.
 
13      In administering sections 401 to 419A (with respect to
 
14 deferred compensation) of the Internal Revenue Code, Public Law
 
15 93-406, section 1017(i), shall be operative for the purposes of
 
16 this chapter.
 
17      In administering section 402 (with respect to the taxability
 
18 of beneficiary of employees' trust) of the Internal Revenue Code,
 
19 the tax imposed on lump sum distributions by section 402(e) of
 
20 the Internal Revenue Code shall be operative for the purposes of
 
21 this chapter and the tax imposed therein is hereby imposed by
 
22 this chapter at the rate determined under this chapter.
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (h)  Section 468B (with respect to special rules for
 
 2 designated settlement funds) of the Internal Revenue Code shall
 
 3 be operative for the purposes of this chapter and the tax imposed
 
 4 therein is hereby imposed by this chapter at a rate equal to the
 
 5 maximum rate in effect for the taxable year imposed on estates
 
 6 and trusts under section 235-51.
 
 7      (i)  Section 469 (with respect to passive activities and
 
 8 credits limited) of the Internal Revenue Code shall be operative
 
 9 for the purposes of this chapter.  For the purpose of computing
 
10 the offset for rental real estate activities for state income tax
 
11 purposes, adjusted gross income as used in section 469 as
 
12 operative for this chapter means federal adjusted gross income.
 
13      (j)  Sections 512 to 514 (with respect to taxation of
 
14 business income of certain exempt organizations) of the Internal
 
15 Revenue Code shall be operative for the purposes of this chapter
 
16 as provided in this subsection.
 
17      "Unrelated business taxable income" means the same as in the
 
18 Internal Revenue Code, except that in the computation thereof
 
19 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
20 apply, and in the determination of the net operating loss
 
21 deduction there shall not be taken into account any amount of
 
22 income or deduction which is excluded in computing the unrelated
 
23 business taxable income.  Unrelated business taxable income shall
 
24 not include any income from a prepaid legal service plan.
 

 
Page 18                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      For a person described in section 401 or 501 of the Internal
 
 2 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
 3 section 235-51 or 235-71 shall be imposed upon the person's
 
 4 unrelated business taxable income.
 
 5      (k)  Section 521 (with respect to cooperatives) and
 
 6 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
 7 and their patrons) of the Internal Revenue Code shall be
 
 8 operative for the purposes of this chapter as to any cooperative
 
 9 fully meeting the requirements of section 421-23, except that
 
10 Internal Revenue Code section 521 cooperatives need not be
 
11 organized in Hawaii.
 
12      (l)  Sections 527 (with respect to political organizations)
 
13 and 528 (with respect to certain homeowners associations) of the
 
14 Internal Revenue Code shall be operative for the purposes of this
 
15 chapter and the taxes imposed in each such section are hereby
 
16 imposed by this chapter at the rates determined under section
 
17 235-71.
 
18      (m)  Section 530 (with respect to education individual
 
19 retirement accounts) of the Internal Revenue Code shall be
 
20 operative for the purposes of this chapter.  For the purpose of
 
21 determining the maximum amount that a contributor could make to
 
22 an education individual retirement account for state income tax
 

 
 
 
Page 19                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 purposes, modified adjusted gross income as used in section 530
 
 2 for this chapter means federal modified adjusted gross income as
 
 3 defined in section 530.
 
 4      (n)  Section 641 (with respect to imposition of tax) of the
 
 5 Internal Revenue Code shall be operative for the purposes of this
 
 6 chapter subject to the following:
 
 7      (1)  The deduction for exemptions shall be allowed as
 
 8           provided in section 235-54(b).
 
 9      (2)  The deduction for contributions and gifts in
 
10           determining taxable income shall be limited to the
 
11           amount allowed in the case of an individual, unless the
 
12           contributions and gifts are to be used exclusively in
 
13           the State.
 
14      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
15           Code as applied by section 641 of the Internal Revenue
 
16           Code is hereby imposed by this chapter at the rate and
 
17           amount as determined under section 235-51 on estates
 
18           and trusts.
 
19      (o)  Section 667 (with respect to treatment of amounts
 
20 deemed distributed by trusts in preceding years) of the Internal
 
21 Revenue Code shall be operative for the purposes of this chapter
 
22 and the tax imposed therein is hereby imposed by this chapter at
 
23 the rate determined under this chapter; except that the reference
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 to tax-exempt interest to which section 103 of the Internal
 
 2 Revenue Code applies in section 667(a) of the Internal Revenue
 
 3 Code shall instead be a reference to tax-exempt interest to which
 
 4 section 235-7(b) applies.
 
 5      (p)  Section 685 (with respect to treatment of qualified
 
 6 funeral trusts) of the Internal Revenue Code shall be operative
 
 7 for purposes of this chapter, except that the tax imposed under
 
 8 this chapter shall be computed at the tax rates provided under
 
 9 section 235-51, and no deduction for the exemption amount
 
10 provided in section 235-54(b) shall be allowed.  The cost-of-
 
11 living adjustment determined under section 1(f)(3) of the
 
12 Internal Revenue Code shall be operative for the purpose of
 
13 applying section 685(c)(3) under this chapter.
 
14      (q)  Section 704 of the Internal Revenue Code (with respect
 
15 to a partner's distributive share) shall be operative for
 
16 purposes of this chapter; except that subsection (b)(2) shall not
 
17 apply to allocations of the high-technology business investment
 
18 tax credit allowed by section 235-110.9.
 
19      [(q)] (r)  Section 1212 (with respect to capital loss
 
20 carrybacks and carryforwards) of the Internal Revenue Code shall
 
21 be operative for the purposes of this chapter; except that for
 
22 the purposes of this chapter the capital loss carryback
 
23 provisions of section 1212 shall not be operative and the capital
 

 
Page 21                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 loss carryforward allowed by section 1212(a) shall be limited to
 
 2 five years[.]; except for qualified high technology businesses
 
 3 under section 235-   , which shall be limited to fifteen years.
 
 4      [(r)] (s)  Subchapter S (sections 1361 to 1379) (with
 
 5 respect to tax treatment of S corporations and their
 
 6 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
 7 operative for the purposes of this chapter as provided in part
 
 8 VII.
 
 9      [(s)] (t)  Section 6015 (with respect to relief from joint
 
10 and several liability on joint return) of the Internal Revenue
 
11 Code is operative for purposes of this chapter.
 
12      [(t)] (u)  Subchapter C (sections 6221 to 6233) (with
 
13 respect to tax treatment of partnership items) of chapter 63 of
 
14 the Internal Revenue Code shall be operative for the purposes of
 
15 this chapter.
 
16      [(u)] (v)  Subchapter D (sections 6240 to 6255) (with
 
17 respect to simplified audit procedures for electing large
 
18 partnerships) of the Internal Revenue Code shall be operative for
 
19 the purposes of this chapter, with due regard to chapter 232
 
20 relating to tax appeals.
 
21      [(v)] (w)  Section 6511(h) (with respect to running of
 
22 periods of limitation suspended while taxpayer is unable to
 
23 manage financial affairs due to disability) of the Internal
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 Revenue Code shall be operative for purposes of this chapter,
 
 2 with due regard to section 235-111 relating to the limitation
 
 3 period for assessment, levy, collection, or credit.
 
 4      [(w)] (x)  Section 7518 (with respect to capital
 
 5 construction fund for commercial fishers) of the Internal Revenue
 
 6 Code shall be operative for the purposes of this chapter.
 
 7 Qualified withdrawals for the acquisition, construction, or
 
 8 reconstruction of any qualified asset which is attributable to
 
 9 deposits made before the effective date of this section shall not
 
10 reduce the basis of the asset when withdrawn.  Qualified
 
11 withdrawals shall be treated on a first-in-first-out basis."
 
12      SECTION 8.  Section 235-7.3, Hawaii Revised Statutes, is
 
13 amended to read as follows:
 
14      "[[]235-7.3[]]  Royalties [and other income from high
 
15 technology business] derived from patents, copyrights, or trade
 
16 secrets excluded from gross income.  [(a)] In addition to the
 
17 exclusions in section 235-7, there shall be excluded from gross
 
18 income, adjusted gross income, and taxable income, amounts
 
19 received by an individual or [a qualified high technology
 
20 business] other person as defined in section 1-19 as royalties
 
21 and other income derived from any patents [and], copyrights[:
 
22      (1)  Owned], or trade secrets owned by the individual or
 
23           [qualified high technology business; and
 

 
Page 23                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  Developed and arising out of a qualified high
 
 2           technology business.] other person.
 
 3      [(b)  For the purposes of this section:
 
 4      "Computer software" means a set of computer programs,
 
 5 procedures, or associated documentation concerned with the
 
 6 operation and function of a computer system, and includes both
 
 7 systems and application programs and subdivisions, such as
 
 8 assemblers, compilers, routines, generators, and utility
 
 9 programs.
 
10      "Qualified high technology business" means a business
 
11 performing qualified research.  The term "qualified high
 
12 technology business" does not include:
 
13      (1)  Any trade or business involving the performance of
 
14           services in the field of law, architecture, accounting,
 
15           actuarial science, performing arts, consulting,
 
16           athletics, financial services, or brokerage services;
 
17      (2)  Any banking, insurance, financing, leasing, rental,
 
18           investing, or similar business; any farming business,
 
19           including the business of raising or harvesting trees;
 
20           any business involving the production or extraction of
 
21           products of a character with respect to which a
 
22           deduction is allowable under section 611 (with respect
 
23           to allowance of deduction for depletion), 613 (with
 

 
Page 24                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           respect to basis for percentage depletion), or 613A
 
 2           (with respect to limitation on percentage depleting in
 
 3           cases of oil and gas wells) of the Internal Revenue
 
 4           Code;
 
 5      (3)  Any business operating a hotel, motel, restaurant, or
 
 6           similar business; and
 
 7      (4)  Any trade or business involving a hospital, a private
 
 8           office of a licensed health care professional, a group
 
 9           practice of licensed health care professionals, or a
 
10           nursing home.
 
11      "Qualified research" means:
 
12      (1)  The same as in section 41(d) of the Internal Revenue
 
13           Code; or
 
14      (2)  Developing, designing, modifying, programming, and
 
15           licensing computer software.]"
 
16      SECTION 9.  Section 235-9.5, Hawaii Revised Statutes, is
 
17 amended to read as follows:
 
18      "[[]235-9.5[]]  Stock options from qualified high
 
19 technology businesses exempt from taxation.  [(a)]
 
20 Notwithstanding any law to the contrary, all income received from
 
21 stock options from a qualified high technology business by an
 
22 employee that would otherwise be taxed as ordinary income or as
 
23 capital gains to those employees is exempt from taxation under
 
24 this chapter.
 

 
Page 25                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      [(b)  For the purposes of this section:
 
 2      "Computer software" means a set of computer programs,
 
 3 procedures, or associated documentation concerned with the
 
 4 operation and function of a computer system, and includes both
 
 5 systems and application programs and subdivisions, such as
 
 6 assemblers, compilers, routines, generators, and utility
 
 7 programs.
 
 8      "Qualified high technology business" means a business
 
 9 performing qualified research.  The term "qualified high
 
10 technology business" does not include:
 
11      (1)  Any trade or business involving the performance of
 
12           services in the field of law, architecture, accounting,
 
13           actuarial science, performing arts, consulting,
 
14           athletics, financial services, or brokerage services;
 
15      (2)  Any banking, insurance, financing, leasing, rental,
 
16           investing, or similar business; any farming business,
 
17           including the business of raising or harvesting trees;
 
18           any business involving the production or extraction of
 
19           products of a character with respect to which a
 
20           deduction is allowable under section 611 (with respect
 
21           to allowance of deduction for depletion), 613 (with
 
22           respect to basis for percentage depletion), or 613A
 

 
 
 
Page 26                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           (with respect to limitation on percentage depleting in
 
 2           cases of oil and gas wells) of the Internal Revenue
 
 3           Code;
 
 4      (3)  Any business operating a hotel, motel, restaurant, or
 
 5           similar business; and
 
 6      (4)  Any trade or business involving a hospital, a private
 
 7           office of a licensed health care professional, a group
 
 8           practice of licensed health care professionals, or a
 
 9           nursing home.
 
10      "Qualified research" means:
 
11      (1)  The same as in section 41(d) of the Internal Revenue
 
12           Code; or
 
13      (2)  Developing, designing, modifying, programming, and
 
14           licensing computer software.]"
 
15      SECTION 10.  Section 235-110.9, Hawaii Revised Statutes, is
 
16 amended to read as follows:
 
17      "[[]235-110.9[]]  High-technology business investment tax
 
18 credit.(a)  There shall be allowed to each taxpayer, subject to
 
19 the taxes imposed by this chapter, a high technology investment
 
20 tax credit that shall be deductible from the taxpayer's net
 
21 income tax liability, if any, imposed by this chapter for the
 
22 taxable year in which the credit is properly claimed.  The tax
 
23 credit shall be an amount equal to ten per cent of the investment
 

 
Page 27                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 made by the taxpayer in each qualified high technology business,
 
 2 up to a maximum allowed credit of $500,000 for the taxable year
 
 3 for the investment made by the taxpayer in a qualified high
 
 4 technology business.
 
 5      (b)  The credit allowed under this section shall be claimed
 
 6 against the net income tax liability for the taxable year.  For
 
 7 the purpose of this section, "net income tax liability" means net
 
 8 income tax liability reduced by all other credits allowed under
 
 9 this chapter.
 
10      (c)  If the tax credit under this section exceeds the
 
11 taxpayer's income tax liability, the excess of the tax credit
 
12 over liability shall be refunded to the taxpayer or may be used
 
13 as a credit against the taxpayer's income tax liability in
 
14 subsequent years until exhausted[.]; provided that no refund on
 
15 account of the tax credit allowed by this section shall be made
 
16 for amounts less than $1.  All claims, including any amended
 
17 claims, for tax credits under this section shall be filed on or
 
18 before the end of the twelfth month following the close of the
 
19 taxable year for which the credit may be claimed.  Failure to
 
20 comply with the foregoing provision shall constitute a waiver of
 
21 the right to claim the credit.
 
22      [(d)  As used in this section:
 

 
 
 
Page 28                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      "Computer software" means a set of computer programs,
 
 2 procedures, or associated documentation concerned with the
 
 3 operation and function of a computer system, and includes both
 
 4 systems and application programs and subdivisions, such as
 
 5 assemblers, compilers, routines, generators, and utility
 
 6 programs.
 
 7      "Investment" means a nonrefundable investment, at risk, as
 
 8 that term is used in section 465 (with respect to deductions
 
 9 limited to amount at risk) of the Internal Revenue Code, in a
 
10 qualified high technology business, of cash that is transferred
 
11 to the qualified high technology business, the transfer of which
 
12 is in connection with a transaction in exchange for stock,
 
13 interests in partnerships, joint ventures, or other entities,
 
14 licenses (exclusive or nonexclusive), rights to use technology,
 
15 marketing rights, warrants, options, or any items similar to
 
16 those included herein, including but not limited to options or
 
17 rights to acquire any of the items included herein.  The
 
18 nonrefundable investment is entirely at risk of loss where
 
19 repayment depends upon the success of the qualified high
 
20 technology business.  If the money invested is to be repaid to
 
21 the taxpayer, no repayment except for dividends or interest shall
 
22 be made for at least three years from the date the investment is
 

 
 
 
Page 29                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 made.  The annual amount of any dividend and interest payment to
 
 2 the taxpayer shall not exceed twelve per cent of the amount of
 
 3 the investment.
 
 4      (e)  For the purposes of this section:
 
 5      "Qualified high technology business" means:
 
 6      (1)  A business, employing or owning capital or property, or
 
 7           maintaining an office, in this State; and which
 
 8      (2)  (A)  Conducts one hundred per cent of its activities in
 
 9                performing qualified research in this State; or
 
10           (B)  Receives one hundred per cent of its gross income
 
11                derived from qualified research; provided that the
 
12                income is received from products sold from,
 
13                manufactured, or produced in the State; or
 
14                services performed in this State.
 
15      The term "qualified high technology business" does not
 
16 include:
 
17      (1)  Any trade or business involving the performance of
 
18           services in the field of law, architecture, accounting,
 
19           actuarial science, performing arts, consulting,
 
20           athletics, financial services, or brokerage services;
 
21      (2)  Any banking, insurance, financing, leasing, rental,
 
22           investing, or similar business; any farming business,
 
23           including the business of raising or harvesting trees;
 

 
Page 30                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           any business involving the production or extraction of
 
 2           products of a character with respect to which a
 
 3           deduction is allowable under section 611 (with respect
 
 4           to allowance of deduction for depletion), 613 (with
 
 5           respect to basis for percentage depletion), or 613A
 
 6           (with respect to limitation on percentage depleting in
 
 7           cases of oil and gas wells) of the Internal Revenue
 
 8           Code;
 
 9      (3)  Any business operating a hotel, motel, restaurant, or
 
10           similar business; and
 
11      (4)  Any trade or business involving a hospital, a private
 
12           office of a licensed health care professional, a group
 
13           practice of licensed health care professionals, or a
 
14           nursing home.
 
15      "Qualified research" means:
 
16      (1)  The same as in section 41(d) of the Internal Revenue
 
17           Code; or
 
18      (2)  Developing, designing, modifying, programming, and
 
19           licensing computer software;
 
20 except that it shall not include research conducted outside the
 
21 State.]
 
22      [(f)] (d)  This section shall not apply to taxable years
 
23 beginning after December 31, 2005."
 

 
Page 31                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      SECTION 11.  Section 235-110.91, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "[[]235-110.91[]]  Tax credit for increasing research
 
 4 activities.(a)  Section 41 (with respect to the credit for
 
 5 increasing research activities) and section 280C(c) (with respect
 
 6 to certain expenses for which the credit for increasing research
 
 7 activities are allowable) of the Internal Revenue Code shall be
 
 8 operative for the purposes of this chapter as provided in this
 
 9 section.  If Section 41 of the Internal Revenue Code is repealed
 
10 or terminated prior to January 1, 2006, its provisions shall
 
11 remain in effect for purposes of the income tax law of the State
 
12 as provided for in subsection (j).
 
13      (b)  All references to Internal Revenue Code sections within
 
14 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
15 operative for purposes of this section.
 
16      (c)  There shall be allowed to each taxpayer, subject to the
 
17 tax imposed by this chapter, an income tax credit for increased
 
18 research activities [that] equal to the credit for research
 
19 activities provided by Section 41 of the Internal Revenue Code.
 
20 The credit shall be deductible from the taxpayer's net income tax
 
21 liability, if any, imposed by this chapter for the taxable year
 
22 in which the credit is properly claimed.
 

 
 
 
Page 32                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      [(d)  The tax credit for increased research activities shall
 
 2 be equal to the sum of:
 
 3      (1)  2.5 per cent of the excess (if any) of:
 
 4           (A)  The qualified research expenses for the taxable
 
 5                year; over
 
 6           (B)  The base amount; and
 
 7      (2)  2.5 per cent of the basic research payments determined
 
 8           under section 41(e)(1)(A) of the Internal Revenue Code.
 
 9      (e)  For purposes of this section:
 
10      (1)  The alternative incremental credit in section 41(c)(4)
 
11           of the Internal Revenue Code shall be equal to the sum
 
12           of 12.5 per cent of:
 
13           (A)  1.65 per cent of so much of the qualified research
 
14                expenses for the taxable year as exceeds one per
 
15                cent of the average described in section
 
16                41(c)(1)(B) but does not exceed 1.5 per cent of
 
17                such average;
 
18           (B)  2.2 per cent of so much of those expenses as
 
19                exceeds 1.5 per cent of the average but does not
 
20                exceed two per cent of the average; and
 
21           (C)  2.75 per cent of so much of those expenses as
 
22                exceeds two per cent of the average;
 

 
 
 
Page 33                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  The term "qualified research" under section 41(d)(1) of
 
 2           the Internal Revenue Code shall not include research
 
 3           conducted outside of the State; and
 
 4      (3)  The term "basic research" under section 41(e) of the
 
 5           Internal Revenue Code shall not include research
 
 6           conducted outside of the State.
 
 7      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
 8 of the Internal Revenue Code shall be equal to the excess of:
 
 9      (1)  The amount of credit determined under section 41(a) (as
 
10           provided for in this section) (without regard to this
 
11           paragraph); over
 
12      (2)  The product of:
 
13           (A)  The amount described in subsection (f)(1); and
 
14           (B)  12.5 per cent of the maximum rate of tax under
 
15                section 11(b)(1) of the Internal Revenue Code.
 
16      (g)] (d)  If the tax credit for increased research
 
17 activities claimed by a taxpayer exceeds the amount of income tax
 
18 payment due from the taxpayer, the excess of the tax credit over
 
19 payments due shall be refunded to the taxpayer or may be used as
 
20 a credit against the taxpayer's income tax liability in
 
21 subsequent years until exhausted[.]; provided that no refund on
 
22 account of the tax credit allowed by this section shall be made
 
23 for amounts less than $1.
 

 
Page 34                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      [(h)] (e)  All claims for a tax credit under this section
 
 2 must be filed on or before the end of the twelfth month following
 
 3 the close of the taxable year for which the credit may be
 
 4 claimed.  Failure to properly claim the credit shall constitute a
 
 5 waiver of the right to claim the credit.
 
 6      [(i)] (f)  The director of taxation may adopt any rules
 
 7 under chapter 91 and forms necessary to carry out this section.
 
 8      [(j)] (g)  This section shall not apply to taxable years
 
 9 beginning after December 31, 2005."
 
10             PART III.  HIGH TECHNOLOGY INDUSTRY BONDS
 
11      SECTIONS 12 to 16  Reserved.
 
12                     PART IV.  VENTURE CAPITAL
 
13      SECTION 17.  The legislature finds that the shortage of
 
14 venture capital in Hawaii makes it difficult for local high
 
15 technology businesses to obtain the necessary financing to
 
16 develop products, enter new markets, and expand on their early
 
17 success.  The purpose of this part is to allow the board of
 
18 trustees of the employees' retirement system to invest ten per
 
19 cent of employees' retirement system funds in qualified high
 
20 technology businesses as a means of providing venture capital for
 
21 those businesses.
 
22      SECTION 18.  Section 88-119, Hawaii Revised Statutes, is
 
23 amended to read as follows:
 

 
Page 35                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      "88-119  Investments.  (a)  Investments may be made in:
 
 2      (1)  Real estate loans and mortgages.  Obligations (as
 
 3           defined in section 431:6-101) of any of the following
 
 4           classes:
 
 5           (A)  Obligations secured by mortgages of nonprofit
 
 6                corporations desiring to build multirental units
 
 7                (ten units or more) subject to control of the
 
 8                government for occupancy by families displaced as
 
 9                a result of government action;
 
10           (B)  Obligations secured by mortgages insured by the
 
11                Federal Housing Administration;
 
12           (C)  Obligations for the repayment of home loans made
 
13                under the Servicemen's Readjustment Act of 1944 or
 
14                under Title II of the National Housing Act;
 
15           (D)  Other obligations secured by first mortgages on
 
16                unencumbered improved real estate owned in fee
 
17                simple; provided that the amount of the obligation
 
18                at the time investment is made therein shall not
 
19                exceed eighty per cent of the value of the real
 
20                estate and improvements mortgaged to secure it,
 
21                and except that the amount of the obligation at
 
22                the time investment is made therein may exceed
 
23                eighty per cent but no more than ninety per cent
 

 
Page 36                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                of the value of the real estate and improvements
 
 2                mortgaged to secure it; provided further that the
 
 3                obligation is insured or guaranteed against
 
 4                default or loss under a mortgage insurance policy
 
 5                issued by a casualty insurance company licensed to
 
 6                do business in the State.  The coverage provided
 
 7                by the insurer shall be sufficient to reduce the
 
 8                system's exposure to not more than eighty per cent
 
 9                of the value of the real estate and improvements
 
10                mortgaged to secure it.  The insurance coverage
 
11                shall remain in force until the principal amount
 
12                of the obligation is reduced to eighty per cent of
 
13                the market value of the real estate and
 
14                improvements mortgaged to secure it, at which time
 
15                the coverage shall be subject to cancellation
 
16                solely at the option of the board of trustees.
 
17                Real estate shall not be deemed to be encumbered
 
18                within the meaning of this subparagraph by reason
 
19                of the existence of any of the restrictions,
 
20                charges, or claims described in section 431:6-308;
 
21           (E)  Other obligations secured by first mortgages of
 
22                leasehold interests in improved real estate;
 
23                provided that:
 

 
Page 37                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                (i)  Each such leasehold interest at such time
 
 2                     shall have a current term extending at least
 
 3                     two years beyond the stated maturity of the
 
 4                     obligation it secures; and
 
 5               (ii)  The amount of the obligation at the time
 
 6                     investment is made therein shall not exceed
 
 7                     eighty per cent of the value of the
 
 8                     respective leasehold interest and
 
 9                     improvements, and except that the amount of
 
10                     the obligation at the time investment is made
 
11                     therein may exceed eighty per cent but no
 
12                     more than ninety per cent of the value of the
 
13                     leasehold interest and improvements mortgaged
 
14                     to secure it;
 
15                provided further that the obligation is insured or
 
16                guaranteed against default or loss under a
 
17                mortgage insurance policy issued by a casualty
 
18                insurance company licensed to do business in the
 
19                State.  The coverage provided by the insurer shall
 
20                be sufficient to reduce the system's exposure to
 
21                not more than eighty per cent of the value of the
 
22                leasehold interest and improvements mortgaged to
 
23                secure it.  The insurance coverage shall remain in
 

 
Page 38                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                force until the principal amount of the obligation
 
 2                is reduced to eighty per cent of the market value
 
 3                of the leasehold interest and improvements
 
 4                mortgaged to secure it, at which time the coverage
 
 5                shall be subject to cancellation solely at the
 
 6                option of the board of trustees;
 
 7           (F)  Obligations for the repayment of home loans
 
 8                guaranteed by the department of Hawaiian home
 
 9                lands pursuant to section 214(b) of the Hawaiian
 
10                Homes Commission Act, 1920; and
 
11           (G)  Obligations secured by second mortgages on
 
12                improved real estate for which the mortgagor
 
13                procures a second mortgage on the improved real
 
14                estate for the purpose of acquiring the
 
15                leaseholder's fee simple interest in the improved
 
16                real estate; provided that any prior mortgage does
 
17                not contain provisions that might jeopardize the
 
18                security position of the retirement system or the
 
19                borrower's ability to repay the mortgage loan.
 
20           The board of trustees may retain such real estate,
 
21           including leasehold interests therein, as it may
 
22           acquire by foreclosure of mortgages or in enforcement
 
23           of security, or as may be conveyed to it in
 

 
Page 39                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           satisfaction of debts previously contracted; provided
 
 2           that all such real estate, other than leasehold
 
 3           interests, shall be sold within five years after
 
 4           acquiring the same, subject to extension by the
 
 5           governor for additional periods not exceeding five
 
 6           years each, and that all such leasehold interests shall
 
 7           be sold within one year after acquiring the same,
 
 8           subject to extension by the governor for additional
 
 9           periods not exceeding one year each;
 
10      (2)  Government obligations, etc.  Obligations of any of the
 
11           following classes:
 
12           (A)  Obligations issued or guaranteed as to principal
 
13                and interest by the United States or by any state
 
14                thereof or by any municipal or political
 
15                subdivision or school district of any of the
 
16                foregoing; provided that principal of and interest
 
17                on such obligations are payable in currency of the
 
18                United States; or sovereign debt instruments
 
19                issued by agencies of, or guaranteed by foreign
 
20                governments;
 
21           (B)  Revenue bonds, whether or not permitted by any
 
22                other provision hereof, of the State or any
 
23                municipal or political subdivision thereof,
 

 
Page 40                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                including the board of water supply of the city
 
 2                and county of Honolulu, and street or improvement
 
 3                district bonds of any district or project in the
 
 4                State; and
 
 5           (C)  Obligations issued or guaranteed by any federal
 
 6                home loan bank including consolidated federal home
 
 7                loan bank obligations, the Home Owner's Loan
 
 8                Corporation, the Federal National Mortgage
 
 9                Association, or the Small Business Administration;
 
10      (3)  Corporate obligations.  Below investment grade or
 
11           nonrated debt instruments, foreign or domestic, in
 
12           accordance with investment guidelines adopted by the
 
13           board of trustees;
 
14      (4)  Preferred and common stocks.  Shares of preferred or
 
15           common stock of any corporation created or existing
 
16           under the laws of the United States or of any state or
 
17           district thereof or of any country;
 
18      (5)  Obligations eligible by law for purchase in the open
 
19           market by federal reserve banks;
 
20      (6)  Obligations issued or guaranteed by the International
 
21           Bank for Reconstruction and Development, the Inter-
 
22           American Development Bank, the Asian Development Bank,
 
23           or the African Development Bank;
 

 
Page 41                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (7)  Obligations secured by collateral consisting of any of
 
 2           the securities or stock listed above and worth at the
 
 3           time the investment is made at least fifteen per cent
 
 4           more than the amount of the respective obligations;
 
 5      (8)  Insurance company obligations.  Contracts and
 
 6           agreements supplemental thereto providing for
 
 7           participation in one or more accounts of a life
 
 8           insurance company authorized to do business in Hawaii,
 
 9           including its separate accounts, and whether the
 
10           investments allocated thereto are comprised of stocks
 
11           or other securities or of real or personal property or
 
12           interests therein;
 
13      (9)  Interests in real property.  Interests in improved or
 
14           productive real property in which, in the informed
 
15           opinion of the board of trustees, it is prudent to
 
16           invest funds of the system.  For purposes of this
 
17           paragraph, "real property" includes any property
 
18           treated as real property either by local law or for
 
19           federal income tax purposes.  Investments in improved
 
20           or productive real property may be made directly or
 
21           through pooled funds, including common or collective
 
22           trust funds of banks and trust companies, group or unit
 
23           trusts, limited partnerships, limited liability
 

 
Page 42                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           companies, investment trusts, title-holding
 
 2           corporations recognized under section 501(c) of the
 
 3           Internal Revenue Code of 1986, as amended, similar
 
 4           entities that would protect the system's interest, and
 
 5           other pooled funds invested on behalf of the system by
 
 6           investment managers retained by the system;
 
 7     (10)  Other securities and futures contracts.  Securities and
 
 8           futures contracts in which in the informed opinion of
 
 9           the board of trustees it is prudent to invest funds of
 
10           the system, including currency, interest rate, bond,
 
11           and stock index futures contracts and options on such
 
12           contracts to hedge against anticipated changes in
 
13           currencies, interest rates, and bond and stock prices
 
14           that might otherwise have an adverse effect upon the
 
15           value of the system's securities portfolios; covered
 
16           put and call options on securities; and stock; whether
 
17           or not the securities, stock, futures contracts, or
 
18           options on futures are expressly authorized by or
 
19           qualify under the foregoing paragraphs, and
 
20           notwithstanding any limitation of any of the foregoing
 
21           paragraphs (including paragraph (4)); and
 
22     (11)  Private placements.  Investments in institutional blind
 
23           pool limited partnerships or direct investments that
 

 
Page 43                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           make private debt and equity investments in privately
 
 2           held companies.
 
 3      (b)  Ten per cent of alternative investments may be
 
 4 dedicated as venture capital investments by the board of trustees
 
 5 in qualified high technology businesses.  Investment under this
 
 6 subsection shall be made under the condition that there shall be
 
 7 three or more unrelated investors other than the system involved
 
 8 in the investment.  The board, in making investments under this
 
 9 subsection, may consult with knowledgeable state agencies,
 
10 corporations, and financial institutions before investing assets
 
11 in qualified high technology businesses.
 
12      For the purposes of this subsection:
 
13      "Computer software" means a set of computer programs,
 
14 procedures, or associated documentation concerned with the
 
15 operation and function of a computer system, and includes both
 
16 systems and application programs and subdivisions, such as
 
17 assemblers, compilers, routines, generators, and utility
 
18 programs.
 
19      "Qualified high technology business":
 
20      (1)  Means:
 
21           (A)  A business, employing or owning capital or
 
22                property, or maintaining an office, in this State;
 
23                and which
 

 
Page 44                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           (B)  (i)  Conducts a majority of its activities in
 
 2                     performing qualified research in this State;
 
 3                     or
 
 4               (ii)  Receives a majority of its gross income
 
 5                     derived from qualified research; provided
 
 6                     that the income is received from products
 
 7                     sold from, manufactured, or produced in the
 
 8                     State; or services performed in this State.
 
 9      (2)  Does not include:
 
10           (A)  Any trade or business involving the performance of
 
11                services in the field of law, architecture,
 
12                accounting, actuarial science, performing arts,
 
13                consulting, athletics, financial services, or
 
14                brokerage services;
 
15           (B)  Any banking, insurance, financing, leasing,
 
16                rental, investing, or similar business; any
 
17                farming business, including the business of
 
18                raising or harvesting trees; any business
 
19                involving the production or extraction of products
 
20                of a character with respect to which a deduction
 
21                is allowable under section 611 (with respect to
 
22                allowance of deduction for depletion), 613 (with
 
23                respect to basis for percentage depletion), or
 

 
Page 45                                                    2901
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1                613A (with respect to limitation on percentage
 
 2                depleting in cases of oil and gas wells) of the
 
 3                Internal Revenue Code;
 
 4           (C)  Any business operating a hotel, motel, restaurant,
 
 5                or similar business; and
 
 6           (D)  Any trade or business involving a hospital, a
 
 7                private office of a licensed health care
 
 8                professional, a group practice of licensed health
 
 9                care professionals, or a nursing home.
 
10      "Qualified research" means:
 
11      (1)  The same as in section 41(d) of the Internal Revenue
 
12           Code; or
 
13      (2)  Developing, designing, modifying, programming, and
 
14           licensing computer software;
 
15 except that it shall not include research conducted outside the
 
16 State.
 
17      "Venture capital investment" means any of the following
 
18 investments in a qualified high technology business:
 
19      (1)  Common or preferred stock and equity securities without
 
20           a repurchase requirement for at least five years;
 
21      (2)  A right to purchase stock or equity securities;
 
22      (3)  Any debenture or loan, whether or not convertible or
 
23           having stock purchase rights, which are subordinated,
 

 
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 1           together with security interests against the assets of
 
 2           the borrower, by their terms to all borrowings of the
 
 3           borrower from other institutional lenders, and that is
 
 4           for a term of not less than three years, and that has
 
 5           no part amortized during the first three years; and
 
 6      (4)  General or limited partnership interests."
 
 7                        PART V.  EDUCATION
 
 8      SECTION 19.  The legislature finds that there is a need to
 
 9 expand educational programs in science and math at Hawaii's "E
 
10 Academies", which were established by Act 178, Session Laws of
 
11 Hawaii 1999, section 17 to afford students greater opportunities
 
12 in new educational technologies, and provide relevant,
 
13 challenging, and meaningful course offerings for students
 
14 interested in pursuing a career in advanced technology fields.
 
15 The legislature finds that the use of "E Academies", which are
 
16 virtual, site-based schools that provide students with industry
 
17 and academic standards-based instruction and assessments in
 
18 technology, science, math, and engineering, offer enhanced
 
19 opportunities to students who are interested in furthering their
 
20 preparation for technology positions or who are interested in
 
21 advanced studies in post secondary information technology,
 
22 science, engineering, and math.
 

 
 
 
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 1      SECTION 20.  There is appropriated out of the general
 
 2 revenues of the State of Hawaii the sum of $1,000,000 or so much
 
 3 thereof as may be necessary for fiscal year 2000-2001 for the
 
 4 expansion of the department of education's E Academies to provide
 
 5 students at virtual onsite locations based at selected high
 
 6 schools with industry and academic standards-based instruction
 
 7 and assessments in technology, science, math, and engineering.  
 
 8      The sum appropriated shall be expended by the department of
 
 9 education for the purposes of this part.
 
10                  PART VI.  WORKFORCE DEVELOPMENT
 
11      SECTION 21.  The legislature finds that there is a need to
 
12 expand the millennium workforce development training program,
 
13 which was created by Act 178, Session Laws of Hawaii 1999,
 
14 section 12, and placed within the department of labor and
 
15 industrial relations for administrative purposes.  In particular,
 
16 the legislature finds that there is a need for Hawaii's public
 
17 community colleges to develop training programs to improve the
 
18 skills of students in those colleges for jobs in the new economy,
 
19 in such industries as biotechnology, health care, information
 
20 technology, environmental science and technology, and
 
21 telecommunications.  The development of new or enhanced programs
 
22 in these and related areas at the State's community colleges will
 

 
 
 
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 1 help to lessen the need to import workers and increase job
 
 2 opportunities for Hawaii's residents by improving their skills in
 
 3 these areas.
 
 4      SECTION 22.  There is appropriated out of the general
 
 5 revenues of the State of Hawaii the sum of $1,000,000 or so much
 
 6 thereof as may be necessary for fiscal year 2000-2001 to be
 
 7 expended by the University of Hawaii's community colleges for the
 
 8 purposes of establishing the Pacific center for advanced
 
 9 technology training where a coordinated statewide approach to
 
10 designing and delivering customized training to the high
 
11 technology industry in Hawaii will be implemented.  
 
12      The sum appropriated shall be expended by the University of
 
13 Hawaii for the purposes of this part.
 
14      SECTION 23.  There is appropriated out of the general
 
15 revenues of the State of Hawaii the sum of $          or so much
 
16 thereof as may be necessary for fiscal year 2000-2001 to be
 
17 expended by Hawaii's public community colleges for the purposes
 
18 of the millennium workforce development program established in
 
19 section 371-17, Hawaii Revised Statutes, to prepare students for
 
20 the workforce of the new economy.  
 
21      The sum appropriated shall be expended by the department of
 
22 labor and industrial relations for the purposes of this part.
 

 
 
 
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 1            PART VII.  UNIVERSITY RESEARCH AND TRAINING
 
 2      SECTION 24.  The purpose of this part is to appropriate
 
 3 funds to the University of Hawaii's college of engineering,
 
 4 college of business administration, college of medicine, and
 
 5 community colleges in order to develop new programs and enhance
 
 6 existing programs to enable Hawaii's students to more effectively
 
 7 compete for jobs in the new economy, in such industries as
 
 8 biotechnology, health care, information technology, environmental
 
 9 science and technology, and telecommunications.  The legislature
 
10 finds that funding these programs for these colleges at the
 
11 University of Hawaii will assist in lessening the need to import
 
12 workers and increase job opportunities for Hawaii's residents by
 
13 improving their skills in these areas.
 
14      SECTION 25.  There is appropriated out of the general
 
15 revenues of the State of Hawaii the sum of $1,000,000 or so much
 
16 thereof as may be necessary for fiscal year 2000-2001 to conduct
 
17 advanced communications research at the University of Hawaii's
 
18 college of engineering.  
 
19      The sum appropriated shall be expended by the University of
 
20 Hawaii for the purposes of this Act.
 
21      SECTION 26.  There is appropriated out of the general
 
22 revenues of the State of Hawaii the sum of $1,000,000 or so much
 
23 thereof as may be necessary for fiscal year 2000-2001 for the
 

 
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 1 expansion of research, scholarship, and instruction in electronic
 
 2 commerce at the University of Hawaii's college of business
 
 3 administration.  
 
 4      The sum appropriated shall be expended by the University of
 
 5 Hawaii for the purposes of this Act.
 
 6      SECTION 27.  There is appropriated out of the general
 
 7 revenues of the State of Hawaii the sum of $1,000,000 or so much
 
 8 thereof as may be necessary for fiscal year 2000-2001 to conduct
 
 9 research in molecular genetics at the University of Hawaii's
 
10 school of medicine.  
 
11      The sum appropriated shall be expended by the University of
 
12 Hawaii for the purposes of this Act.
 
13      SECTION 28.  There is appropriated out of the general
 
14 revenues of the State of Hawaii the sum of $500,000 or so much
 
15 thereof as may be necessary for fiscal year 2000-2001 to develop
 
16 new programs and enhance existing programs at the University of
 
17 Hawaii at Hilo to prepare students for the workforce of the new
 
18 economy.  
 
19      The sum appropriated shall be expended by the University of
 
20 Hawaii for the purposes of this Act.
 
21            PART VIII.  TECHNOLOGY ADVISORY COMMISSION
 
22      SECTION 29.  The legislature finds that the governor's
 
23 special advisory council for technology development, which was
 
24 established under Act 178, Session Laws of Hawaii 1999, section
 

 
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 1 3, has the potential to make significant contributions to the
 
 2 development of the State's high technology industry.  While the
 
 3 intent of the advisory council was to attract leaders in high
 
 4 technology development from around the world to Hawaii, however,
 
 5 the legislature finds it highly unlikely that these individuals
 
 6 will come to Hawaii for this purpose if they are faced with a
 
 7 possibly lengthy senate confirmation process and must file
 
 8 financial disclosure forms with the state ethics commission.
 
 9      The legislature finds that there is no reason to subject
 
10 these individuals to confirmation hearings and the filing of
 
11 ethics disclosure forms, in view of the fact that the advisory
 
12 council is strictly advisory in nature and the members of that
 
13 council have no influence over spending or budgetary matters.
 
14 The legislature also recognizes the need to bring in persons who
 
15 have international prestige and expertise in high technology, and
 
16 it would be otherwise extremely difficult to find such highly
 
17 qualified people to serve on the council before its expiration on
 
18 December 31, 2005.  Accordingly, the purpose of this part is to
 
19 exempt the members of the governor's special advisory council for
 
20 technology development from the senate confirmation process and
 
21 from the need to file a disclosure of financial interests with
 
22 the state ethics commission.
 

 
 
 
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 1      SECTION 30.  Section 27-42, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "[[]27-42[]]  Governor's special advisory council for
 
 4 technology development; establishment; appointment, number, and
 
 5 term of members; duties.(a)  There is established within the
 
 6 office of the governor, for administrative purposes, an advisory
 
 7 council to be known as the governor's special advisory council
 
 8 for technology development, that shall review and make
 
 9 recommendations on matters relating to the marketing and
 
10 promotion of Hawaii as a location for high technology companies.
 
11 The council shall be composed of at least eleven but no more than
 
12 twenty-five members [appointed in accordance with section 26-34],
 
13 and shall include representatives of the high technology
 
14 industry, business leaders, educators, government leaders, and
 
15 legislators.
 
16      (b)  The members shall be appointed by the governor for four
 
17 years, except that the terms of the members first appointed shall
 
18 be for two and four years, respectively, as designated by the
 
19 governor at the time of appointment.  The council shall elect a
 
20 chairperson from among its members.
 
21      (c)  In appointing members, the governor shall select
 
22 persons who have knowledge of the high technology industry, the
 
23 educational needs of the industry, or in the marketing and
 

 
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 1 promotion of high technology industries.  The members of the
 
 2 council shall serve without compensation but shall be reimbursed
 
 3 for expenses, including travel expenses, necessary for the
 
 4 performance of their duties.
 
 5      (d)  The council shall assist the special advisor for
 
 6 technology development in developing and coordinating the
 
 7 marketing and promotion of the high technology industry in
 
 8 Hawaii.
 
 9      (e)  In carrying out the duties of this section, the council
 
10 shall seek and utilize any available funding sources, including
 
11 grant moneys.
 
12      (f)  This section is repealed on December 31, 2005."
 
13      SECTION 31.  Section 84-17, Hawaii Revised Statutes, is
 
14 amended by amending subsection (c) to read as follows:
 
15      "(c)  The following persons shall file annually with the
 
16 state ethics commission a disclosure of financial interests:
 
17      (1)  The governor, the lieutenant governor, the members of
 
18           the legislature, and delegates to the constitutional
 
19           convention; provided that delegates to the
 
20           constitutional convention shall only be required to
 
21           file initial disclosures;
 
22      (2)  The directors and their deputies, the division chiefs,
 
23           the executive directors and the executive secretaries
 

 
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 1           and their deputies, the purchasing agents and the
 
 2           fiscal officers, regardless of the titles by which the
 
 3           foregoing persons are designated, of every state agency
 
 4           and department;
 
 5      (3)  The permanent employees of the legislature and its
 
 6           service agencies, other than persons employed in
 
 7           clerical, secretarial, or similar positions;
 
 8      (4)  The administrative director of the State, and the
 
 9           assistants in the office of the governor and the
 
10           lieutenant governor, other than persons employed in
 
11           clerical, secretarial, or similar positions;
 
12      (5)  The hearings officers of every state agency and
 
13           department;
 
14      (6)  The president, the vice presidents, assistant vice
 
15           presidents, the chancellors, and the provosts of the
 
16           University of Hawaii and its community colleges;
 
17      (7)  The superintendent, the deputy superintendent, the
 
18           assistant superintendents, the district
 
19           superintendents, the state librarian, and the deputy
 
20           state librarian of the department of education;
 
21      (8)  The administrative director and the deputy director of
 
22           the courts;
 

 
 
 
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 1      (9)  The members of every state board or commission whose
 
 2           original terms of office are for periods exceeding one
 
 3           year and whose functions are not solely advisory;
 
 4           provided that the governor's special advisory council
 
 5           for technology development established pursuant to
 
 6           section 27-42 shall be exempt from this subsection;
 
 7     (10)  Candidates for state elective offices, including
 
 8           candidates for election to the constitutional
 
 9           convention, provided that candidates shall only be
 
10           required to file initial disclosures; and
 
11     (11)  The administrator and assistant administrator of the
 
12           office of Hawaiian affairs."
 
13            PART X.  MARKETING AND ELECTRONIC COMMERCE
 
14      SECTION 32.  The legislature finds that the internet is a
 
15 critical component of the new economy because of its enormous
 
16 potential to increase efficiency and raise productivity.
 
17 Internet commerce, which is probably the most significant
 
18 component of electronic commerce, or "e-commerce", includes such
 
19 areas as online financial services, consumer retain and business-
 
20 to-business transactions, media, infrastructure, and consumer and
 
21 business internet access services.
 
22      The legislature further finds that the total United States
 
23 internet economy more than doubled between 1996 and 1997, from
 
24 $15,500,000,000 to $38,800,000,000.  By 2001, it has been
 

 
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 1 projected that the total United States internet economy will be
 
 2 over $350,000,000,000.  Of this amount, business-to-business e-
 
 3 commerce is expected to account for the largest share, while
 
 4 consumer retail activity is expected to emerge more slowly,
 
 5 totaling over $18,000,000,000 in the year 2001.
 
 6      The purpose of this part is to increase the State's share of
 
 7 this significant economic activity and the facilitation of e-
 
 8 commerce in Hawaii through the development of partnerships
 
 9 between the Hawaii tourism authority and Hawaii's business
 
10 community to promote the State, through a coordinated statewide
 
11 effort, as an internet and server-friendly place to conduct
 
12 electronic commerce.
 
13      SECTION 33.  Section 201B-7, Hawaii Revised Statutes, is
 
14 amended by amending subsection (a) to read as follows:
 
15      "(a)  The authority may enter into contracts and agreements
 
16 that include the following:
 
17      (1)  Tourism promotion, marketing, and development;
 
18      (2)  Market development-related research;
 
19      (3)  Product development and diversification issues;
 
20      (4)  Promotion, development, and coordination of sports-
 
21           related activities and events;
 
22      (5)  Promotion of Hawaii, through a coordinated statewide
 
23           effort, as an internet and server-friendly place to
 
24           conduct electronic commerce, including entering into
 

 
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 1           appropriate public-private sector business
 
 2           partnerships.  As used in this paragraph, the terms
 
 3           "electronic commerce" and "internet" have the same
 
 4           meanings as defined in section 231-8.6(c);
 
 5     [(5)] (6)  Reduction of barriers to travel;
 
 6     [(6)] (7)  Tourism public information and educational
 
 7           programs;
 
 8     [(7)] (8)  Programs to monitor and investigate complaints
 
 9           about the problems resulting from the tourism industry
 
10           in the State; and
 
11     [(8)] (9)  Any and all other activities necessary to carry
 
12           out the intent of this chapter;
 
13 provided that for the purposes of continuity, the Hawaii Visitors
 
14 and Convention Bureau shall be the designated agency to conduct
 
15 the marketing and promotion of the State until the end of fiscal
 
16 year 1998-1999 or until a date specified by the board."
 
17      SECTION 34.  Statutory material to be repealed is bracketed.
 
18 New statutory material is underscored.
 
19      SECTION 35.  This Act shall take effect upon its approval;
 
20 provided that sections 20, 22, 23, 25, 26, 27, and 28 shall take
 
21 effect on July 1, 2000.